The Bank of Canada is continuing to raise interest rates, even though inflation has come down quite a bit. Undoubtedly, Canada’s inflation rate fell to 2.8% for the month of June. That’s the lowest it’s been in around two years. And though the rate is in a more manageable 2-3% range, it certainly does not feel like inflation has come back to Earth. Believe it or not, sticker shock at the grocery store is still a thing! And the headline inflation number, I believe, doesn’t quite tell the whole story.
Many consumers are still upset that food prices continue to rise at a rapid rate. Undoubtedly, the grocers may be part of the reason prices have gotten out of hand. They have faced quite a bit of backlash in recent quarters.
In any case, I think we’re starting to get the feel of normalcy again. Though it will probably take several more months, and perhaps a few more 25-basis-point rate hikes before food prices stop soaring into the stratosphere.
Bank of Canada rate hikes: How many more are coming?
Nobody knows how many rate hikes are left in the tank. Regardless, I think it’s wise for investors to be ready to embrace another year (or more) of this high-rate environment. In this piece, we’ll look at one income stock that can fare well even if rates creep even higher from here. Indeed, 5% rates seem like enough to knock inflation down, but it may need to stay in the range for a while longer to keep it sustainably below the 3% mark.
Without further ado, let’s check in with TD Bank (TSX: TD). Indeed, the financials are poised to view rates as a slight tailwind, rather than a harsh headwind that only stands to weigh on results. Of course, that’s assuming high rates don’t cause some sort of hard landing for the Canadian economy. In that case, no firm, financial or not, will be immune to the rough waters.
TD Bank
TD Bank is Canada’s most American bank, and for many years, such a title has been a good thing. TD has been doing a good job of finding greater growth south of the border with its impressive U.S. retail banking business. With an outstanding balance sheet and enough firepower to make a huge deal, I view TD as a Canadian bank that may be able to use mergers and acquisitions to outdo its peers over the next 10 years.
For now, TD is standing pat on the deal front. It did walk away from its pursuit of First Horizons Bank earlier in the year, as the American regionals fell into crisis. Indeed, TD’s reputation as an acquirer may have taken a tiny hit. However, I think the whole situation will quickly be forgotten a year from now when the early 2023 U.S. regional banking woes are a distant memory.
For now, TD is a 4.46% yielder going for less than 11 times trailing price to earnings — that’s quite cheap.
With Charles Schwab expected to boost the third quarter, I’d look to buy TD stock while it begins to add to its bounce off recent lows.
At this juncture, there’s plenty of risk ahead. However, TD seems well positioned to expand margins with every Bank of Canada rate hike. Finally, if climbing rates cause turmoil in banking once again, don’t expect TD to fold, as it’s extremely well capitalized, stress tested, and crisis ready. TD is one of the bluer blue chips out there, after all.
